Lessons From The Past Failings Of British Manufacturing

A new study of British and German manufacturing in the early post-war decades shows how weak competition and restrictions on international trade and investment undermined productivity growth.

The research by Professors Nicholas Crafts and Terence Mills, published in the July 2005 Economic Journal, shows that 1950s and 1960s Europe failed to realise the full potential of technological progress. Indeed, productivity growth was about 2% a year below what could have been achieved.
Professor Crafts comments:
”The message is that the Golden Age of European economic growth would have
been even more impressive had it occurred at a time of globalisation.”
The study finds that, unlike its German counterpart, British manufacturing in the early postwar period operated with high price-cost margins. In other words, competition was weak and market power was substantial. This was a major factor in the under-performance of British manufacturing at least through the 1970s, as weak and self-indulgent managers could flourish despite not exploiting the opportunities for cost reduction that new technology offered.

The obvious implication is that in the early post-war decades, British manufacturing was not operating on the basis of what is now described as the ”Anglo-Saxon” model of capitalism and that the absence of globalisation and the weakness of competition undermined productivity growth. This certainly chimes with the message that the British government would like the European Union to heed. But it also reminds us that Labour politicians offer this advice with the zeal of the new convert and the scars of a painful lesson from our own economic history.

The research uses advanced econometric methods to distinguish the trend component of productivity growth due to technological progress from other influences. The reason for the failure to realise the full potential of technological advance was that capital shortages held back what could have been profitable investments. This was a problem common to other European countries, such as West Germany. The inelasticity of the supply of capital goods is a classic symptom of the restrictions on trade and international investment that characterised the early post-war decades.

”TFP Growth in British and German Manufacturing, 1950-1996 by Nicholas Crafts and Terence Mills is published in the July 2005 issue of the Economic Journal. Nicholas Crafts is Professor of Economic History at the London School of Economics. Terence Mills is Professor of Economics at Loughborough University.

Nicholas Crafts

020-7955-6399 | n.crafts@lse.ac.uk

Terence Mills

01509-22703 | t.c.mills@lboro.ac.uk